Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen

Exercise 13

ACCOUNTING RATE OF RETURN
Ferguson Medical, Inc., is planning on investing in some new echocardiogram equipment that will require an initial outlay of $100,000. The system has an expected life of five years and no expected salvage value. The investment is expected to produce the following net cash flows over its life: $40,000, $40,000, $50,000, $50,000, and $60,000.
Required:
1. Calculate the annual net income for each of the five years.
2. Calculate the accounting rate of return.
3. What if a second competing revenue-producing investment has the same initial outlay and salvage value but the following cash flows (in chronological sequence): $60,000, $60,000, $60,000, $40,000, and $10,000? Using the accounting rate of return metric, which project should be selected: the first or the second? Which project is really the better of the two?